A high price to pay? Britain and the European budget JAMES SPENCE Of bougets and budgets … Shadows of ‘bougets’, in the old sense of moneybags, loom over Britain’s stance on the EU budget today, as they did over EC budgets 40 years ago. Three of the make-or-break issues for the UK in the negotiations over the multiannual finan- cial framework (MFF) for the period from 2014 to 2020 concern the direct cost of UK membership. The first is maintaining the British correction or ‘rebate’, while also maintaining member state sovereignty over budget revenue decisions. (The current rebate, some claim, was finally gained by another ‘bouget’, Mrs Thatcher’s fabled handbag, in 1984.) Cutting finance to the Common Agricultural Policy (CAP) is the second, and closely linked to the first. At the time Britain was negoti- ating its terms for accession, its less Eurocentric agricultural trade patterns, and its higher dependence on cheap food imports from outside the Communities, marked it off from the six founding EC member states for which food security was a high priority.1 UK food prices were relatively low compared to Continental prices. Agriculture was a smaller economic and employment sector in the UK than it was in Continental Europe, and land ownership patterns also differed markedly. The third, and again related, issue is reducing the overall size of the MFF: that is, limiting the amounts available for the EU’s annual budgets over several years, and therefore reducing the UK’s contributions. All three issues take account largely of direct costs—a book-keeping view— rather than the direct and indirect implications of membership. They tend to underestimate the broader benefits, and the effects, of policy changes at European level over time. How have these three issues affected Britain’s benefiting from the EU budget? Has the price been too high? Or has Britain squandered opportunities by taking a book-keeper’s view rather than that of a public investor? The EC budget and British stances before accession The UK stood aside from the early beginnings of the European Communities after the Second World War. An attentive and growing Commonwealth watched 1 Belgium, France, West Germany, Italy, Luxembourg and the Netherlands. International Affairs 88: 6 (2012) 1237–1260 © 2012 The Author(s). International Affairs © 2012 The Royal Institute of International Affairs. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford ox4 2dq, UK and 350 Main Street, Malden, MA 02148, USA. James Spence the dismemberment of the empire, concerned about the UK’s trade preferences.2 Continental Western Europe’s burgeoning economies benefited from a period of peace and cooperation through agreements such as the enlightened Marshall Plan, and the treaties of Brussels, Paris and Rome. Britain’s economic fortunes during the 1950s and 1960s did not prosper greatly, and by the end of the latter decade Britain was one of the poorer countries among the EC members and accession states. Though invited to participate at preparatory meetings of the six founder members of the European Coal and Steel Community (ECSC), the British govern- ment did not commit itself to the enterprise and missed opportunities to shape the direction and policies of the developing economic and atomic energy communi- ties agreed in the Rome Treaties of 1957.3 Financing the new communities did not immediately exceed finance of the Coal and Steel Community, formed in 1951. In 1958, of a total equivalent of 81.3 million EUR, 86.5 per cent of Community expenditure was on the Coal and Steel Community. Agricultural policy divergences Britain’s views on agricultural policy differed from those of the Six, despite shared memories of the horrendous hardships of the Second World War, and of the starvation, scarcity and humanitarian crises of the early postwar period.4 State intervention in food production was common in postwar Europe. Freedom of movement of agricultural goods conflicted with national intervention mecha- nisms. Important food production markets in Central and Eastern Europe had been cut off from Western Europe through the formation of the Soviet bloc. The CAP aimed to reduce and rationalize these intervention mechanisms, enabling agricultural matters to be managed at EC level while also allowing a greater degree of freedom of movement of agricultural products. People needed food at reasonable prices, cushioned from the instability of world prices and supply. Encouraging agricultural production became an indispensable element of economic recovery in Europe. The terms of the 1957 EEC Treaty describing the CAP’s aims were thus understandable. After much wrangling, and an empty (French) chair, the Six agreed to finance the Common Agricultural Policy through the EC budget, which changed the size and form of the latter dramatically. The Six were unimpressed by Britain’s attempts to create a competing but looser free trade area. Nor did they welcome the idea that the Council of Europe should be the hub for the growing network of Community agreements in the 2 See e.g. Nicholas Fram, ‘Decolonization, the Commonwealth, and British trade 1945–2004’, Stanford University, 2006, http://www.stanford.edu/group/siepr/cgi-bin/pubpol/?q=system/files/shared/documents/ Fram_Nicholas.pdf, accessed 22 Sept. 2012. Fram concludes: ‘The downward trend in UK trade with its empire in the two decades following World War II indicates that it was not the UK’s adoption of the EEC’s common external tariff [in 1973] that forced empire trade into decline. Rather, British trade with its empire had, for a myriad reasons, been declining ever since the end of the Second World War’ (p. 54). 3 Roy Denman, Missed chances: Britain and Europe in the twentieth century (London: Cassell, 1996). 4 Tony Judt describes the period in sombre terms in Postwar (London: Heinemann, 2005), p. 89. 1238 International Affairs 88: 6, 2012 Copyright © 2012 The Author(s). International Affairs © 2012 The Royal Institute of International Affairs. A high price to pay? 1950s.5 The Six wished to create a union that would go beyond a traditional inter- national organization and in which some sovereignty would be pooled. The EC budget as symbol of growing unity The EC budget became a symbol of that vision, with contributions not necessarily in line with gross national product (GNP), but rather reflecting the benefits of the policies pursued together, within a context where activities were financed and implemented by the Community’s executive, where democratic and judicial insti- tutions held sway, where the Community’s executive shared its task with member states’ executive authorities, and where the goal was an ever closer union. The budget course was set down most clearly in the treaties of 1970 and 1975,6 coinciding with Britain’s accession to the Community. These set out the broad principles and procedures of the EC budget and its financial autonomy, which were then elucidated in legislative rules and administrative guidance. The course confirmed inter alia the agricultural policy set out at the 1958 Stresa Conference, implemented in 1962, financed through the EC budget and confirmed by the 1965 merger treaty.7 Between 1965 and 1970 agriculture’s share of all Community expenditure rose from 8.5 per cent to 86.9 per cent, in figures from 28.7 million EUR to 3,108 million EUR. This was achieved in part through transfer of national agricultural expenditure to the EC budget. Own resources to replace national contributions … The Six had agreed in 1970 that revenue for the EC budget should take the form of own resources stemming from the functions of the European Commun­­ ities as a trading bloc and single market.8 Own resources are now defined as ‘revenue allocated irrevocably to the Union to finance its budget and accruing to it automatically without the need for any subsequent decision by the national authorities’,9 even if collected by the individual member states. They were to be agreed unanimously by member states in Council and then ratified nationally. Customs duties and agricultural levies on imported products from outside the Communities, and sugar levies, formed one own resource, now called ‘traditional’. A 1 per cent share of a uniform value added tax (VAT) on traded goods and services within the common market formed the second own resource.10 5 Anthony Eden, Full circle (London: Cassell, 1960). 6 Treaty amending certain budgetary provisions (1970), Official Journal of the European Communities L 2, 2 Jan. 1971; Treaty amending certain financial provisions (1975), Official Journal of the European Communities L 359, 31 Dec. 1977. 7 Merger Treaty (1965), Official Journal of the European Communities 152, 13 July 1967. 8 The EC treaty provisions stated that ‘without prejudice to other revenue, the budget shall be financed wholly from own resources’. 9 European Commission, European Union public finance, 4th edn (Luxembourg: Office for Official Publications of the European Communities, 2008), p. 135. 10 VAT was introduced in the UK on 1 April 1973, and became an EC budget revenue source from all nine member states in 1979. 1239 International Affairs 88: 6, 2012 Copyright © 2012 The Author(s). International Affairs © 2012 The Royal Institute of International Affairs. James Spence Duties and levies were initially relatively high, while levels of food self- sufficiency rose from a low level. Consumption began as a high proportion of personal expenditure. This trend would assure a healthy inflow of the harmonized VAT share. The UK would contribute relatively more than others, in part because its VAT base represented a higher percentage of GNP compared to other member and accession states. But no sooner were they agreed than the two own resources proved insufficient to meet the needs of the EC budget.11 … based on the customs union and internal market An EC customs union and incipient internal market for the tariff-free exchange of goods and services was key to economic recovery and to the healthy growth of agricultural production.